Reserve Bank of Australia Annual Report – 1987 Financial Statements Summary of Accounting Policies

Notes to and Forming Part of the Financial Statements
30 June 1987

Note 1 Summary of Accounting Policies

The financial statements have been prepared in accordance with the Reserve Bank Act and based on the forms prescribed by the Reserve Bank Regulations supplemented by information, including these Notes, which form part of the statements. All amounts are shown in $'000 and have been expressed in Australian dollars unless another currency is indicated.

Current market values are used for the Bank's major assets including domestic and foreign marketable securities, gold and foreign currency, and also for premises and shares in international financial institutions. The impact on the relevant asset revaluation reserves is shown in Note 3. In other cases, an historical cost basis of accounting is used.

Income measurement is based on realised gains/losses passing through the profit and loss account. That part of the Investment Revaluation Reserve and/or Foreign Currency Revaluation Reserve relating to investments and/or currencies disposed of in the course of the financial year is transferred to earnings for inclusion in the calculation of income. (See also Note 3.) Income and expenditure are brought to account on an accrual basis.

(a) Allocation of assets between Central Bank and Note Issue Department

As at 30 June 1987, revised arrangements were introduced for the allocation of assets between the Central Bank and Note Issue Department.

From 30 June, all funds of Note Issue Department apart from those used for premises and other durable assets will be held on deposit with the Central Bank, and will earn a rate of interest related to the net return on the Bank's holdings of gold, domestic and foreign securities. This change has been designed to simplify the management of, and accounting for, the Bank's trading portfolio.

Reflecting the change, balances in the Gold Revaluation and Investment Revaluation reserves in Note Issue Department were transferred to Central Bank on 30 June 1987; so too were the balances held by Note Issue Department in a Provision for the Effects of Movements in Market Yields. (See Note 5.)

(b) Gold, foreign exchange and foreign currency translation

Gold includes gold loans and is valued at the Australian dollar equivalent, on the last business day of June, of the average London gold price per fine ounce for the month of June (June 1987 — US$449.59; June 1986 — US$342.72).

Foreign exchange is mainly invested in various types of government securities and bank deposits; it includes IMF special drawing rights amounting to $471.4 million at 30 June ($478.1 million at 30 June 1986). Marketable securities are reported at market values on the last business day of June; accrued interest on coupon securities is also included in the item Gold and Foreign Exchange. Unrealised market valuation adjustments are taken to the appropriate asset revaluation reserve. Income on such assets is translated to Australian dollars using the exchange rate of the date it is received.

Assets and liabilities denominated in foreign currency are converted to Australian dollar equivalents at exchange rates ruling on the last business day of June. Unrealised gains and losses arising from exchange rate fluctuations are taken to the Foreign Currency Revaluation Reserve.

Gains or losses realised on sale of foreign currency are taken to profit and loss.

(c) Commonwealth Government securities

These securities are valued at market prices on the last business day of June. Unrealised gains and losses resulting from such valuations are taken to the Investment Revaluation Reserve (Note 3).

(d) Bank premises and other durable assets

Premises are reported at market valuations determined on a triennial basis by independent valuers. The last valuation was made in 1986. Amounts written off in terms of Section 78 of the Reserve Bank Act, are based on these market values and annual reassessments of useful life remaining.

Other durable assets are recorded at cost less depreciation, which is calculated at rates appropriate to estimated useful life.

Details of annual net expenditure, revaluation increments and write off/depreciation of these assets are included in Note 6.

(e) Asset revaluation reserves

Asset revaluation reserves reflect unrealised gains and losses resulting from changes in the market values of the Bank's major assets. These reserves are shown in aggregate in the respective balance sheets of the Central Bank and Note Issue Department.

Movements in the reserves over 1986/87 are set out in Note 3 to the accounts.

(f) Provisions

The Provision for the Effects of Movements in Market Yields was established so that, in conjunction with the Investment Revaluation Reserve, the Bank could provide against losses arising from fluctuations in the prices of securities held by the Bank. Amounts are transferred from earnings to the Provision in accordance with Section 78 of the Reserve Bank Act. From 30 June 1987, the Provision will be held entirely in the accounts of Central Bank. This reflects the allocation from that date of all Commonwealth Government securities to Central Bank. (See also Note 1(a).)

The Provision for the Effects of Movements in Exchange Rates was established so that, in conjunction with the Foreign Currency Revaluation Reserve, the Bank could provide against the effects of losses arising from fluctuations in exchange rates. Amounts are transferred from earnings to the Provision in accordance with Section 78 of the Reserve Bank Act. The Provision is held entirely in the accounts of Central Bank.

Provision for notes not presented comprises the value of Australian notes of a denomination not exceeding One pound or Two dollars that have been on issue for more than 20 years and Australian notes of a denomination exceeding One pound or Two dollars that have been on issue for more than 40 years. These notes are not included in the item “Australian notes on issue”.

Provisions are assessed at balance date. Any transfers out of these Provisions and supplementary allocations from 1986/87 earnings are shown in Note 5.

(g) Officers' Superannuation Fund

The assets of the Reserve Bank Officers' Superannuation Fund are held by the Bank in accordance with the Reserve Bank (Officers' Superannuation) Rules made pursuant to Section 70 of the Reserve Bank Act, but are not included in these statements. The Bank's contributions to the Fund in accordance with the Rules are included in staff costs in Note 2.